Just pointing out that your math is incorrect. You're right in stating that the $65k is per unit (2 drones) and that the contract is for 12,000 drones, but you mistakenly apply the $65k to 12,000 drones when it's actually 6,000 units (2 drones per unit).
That math alone brings down the contract from your $780M (similar to Mike's) to a more accurate $390M not including the extra parts, servicing, etc (flyaway costs).
You also can't apply VC muiltiples on public equities. $AVAV is more accurate and it's already on par with them
Thank you, Paul. I see where I went wrong, and have corrected it. Ultimate outcome is of course the same as before but I will revisit the multiple. Valuing RCAT intrinsically might be too much of a stretch at this point, and definitely best to be conservative with this thing. What extra revenue do you anticipate apart from servicing? Think there's potential to provide replacement parts of the core drone and modules (both current and those in development)? Curious if you have more insights on this.
Yea for early stage fast growth contractors, you have to think about long-term potential but given they're in the public markets, the added benefit of that is hit with the ebbs and flows of investor sentiment and liquidity. Skydio benefits from investors thinking 10 years down the road with no real option to pull liquidity out of they need to, so not apples to apples.
As far as the extra parts, in the defense budgets which I break down on my post, there's a budget allocation for servicing, parts, training, etc. Given SRR 2 has more needs for the drone, the cost of that line item has gone up as it should.
So while the 'drone' portion is still sizable, there's also the flyaway costs which boost the overall contract value.
It's all broken down in my PDF and how to value it
I'm afraid I'm not in the paid tier. The lock-in difference makes total sense, but have you considered the huge delta in AeroVironment's trailing vs. forward EV/Sales? Something like 7x vs. 21x. Yes, they have economies of scale, which seems to be the true competitive advantage in this space. But 10x doesn't seem irrational for RCAT with this information. Appreciate your comments.
So when you value defense contractors, especially nascent ones, you have to realize that they're very contract dependent without the probability of a sticky continued contract.
For instance, if you're buying fighter jets, you're going to LMT, not really anyone else. If you're buying the best missile systems, you're going to RTX.
They've commanded this ability through decades of R&D and consolidation.
With nascent weapons manufacturers they're future might be bright but it's also very uncertain. Case in point Skydio who won the SRR 1 might very well lose in the SRR 2 bidding.
So when you're factoring uncertainty of future o
Contracts, even though this one is ~3.4x the size of the entire company, it's not wise to underwrite aggressive growth multiples if you're not certain of future wins
Yes, the US certainly does a good job of protecting and encouraging the development of parasitic loafers.
Just pointing out that your math is incorrect. You're right in stating that the $65k is per unit (2 drones) and that the contract is for 12,000 drones, but you mistakenly apply the $65k to 12,000 drones when it's actually 6,000 units (2 drones per unit).
That math alone brings down the contract from your $780M (similar to Mike's) to a more accurate $390M not including the extra parts, servicing, etc (flyaway costs).
You also can't apply VC muiltiples on public equities. $AVAV is more accurate and it's already on par with them
https://www.cedargrovecm.com/p/red-cat-rcat-trade-worth-up-to-200-prcnt
Thank you, Paul. I see where I went wrong, and have corrected it. Ultimate outcome is of course the same as before but I will revisit the multiple. Valuing RCAT intrinsically might be too much of a stretch at this point, and definitely best to be conservative with this thing. What extra revenue do you anticipate apart from servicing? Think there's potential to provide replacement parts of the core drone and modules (both current and those in development)? Curious if you have more insights on this.
Yea for early stage fast growth contractors, you have to think about long-term potential but given they're in the public markets, the added benefit of that is hit with the ebbs and flows of investor sentiment and liquidity. Skydio benefits from investors thinking 10 years down the road with no real option to pull liquidity out of they need to, so not apples to apples.
As far as the extra parts, in the defense budgets which I break down on my post, there's a budget allocation for servicing, parts, training, etc. Given SRR 2 has more needs for the drone, the cost of that line item has gone up as it should.
So while the 'drone' portion is still sizable, there's also the flyaway costs which boost the overall contract value.
It's all broken down in my PDF and how to value it
I'm afraid I'm not in the paid tier. The lock-in difference makes total sense, but have you considered the huge delta in AeroVironment's trailing vs. forward EV/Sales? Something like 7x vs. 21x. Yes, they have economies of scale, which seems to be the true competitive advantage in this space. But 10x doesn't seem irrational for RCAT with this information. Appreciate your comments.
So when you value defense contractors, especially nascent ones, you have to realize that they're very contract dependent without the probability of a sticky continued contract.
For instance, if you're buying fighter jets, you're going to LMT, not really anyone else. If you're buying the best missile systems, you're going to RTX.
They've commanded this ability through decades of R&D and consolidation.
With nascent weapons manufacturers they're future might be bright but it's also very uncertain. Case in point Skydio who won the SRR 1 might very well lose in the SRR 2 bidding.
So when you're factoring uncertainty of future o
Contracts, even though this one is ~3.4x the size of the entire company, it's not wise to underwrite aggressive growth multiples if you're not certain of future wins
Fair point, thanks for the insights Paul.
exellent artic.
Great write up! Very bullish. Cheers